I am struggling to understand the concept of materiality and why in this question the 5% has been set on the profit after tax?
So far I have prepared my answer:
Prepared answer: that the financial statements would not be comparable and what might be a considered immaterial one year might not be immaterial the next
however I am struggling to understand:
- Why this figure was set on profit after tax?
- What might be the problems of using that figure rather than another?
- To which items in the financial statements will it not apply?
Question: An accountant has set a limit of 5% of profit after tax for materiality in the draft financial statements, so that errors below 5% of profit when aggregated will be regarded as immaterial and not adjusted when the final financial statements are prepared.
What might be the problems of using that figure rather than another? To which items in the financial statements will it not apply?
So far I have prepared my answer:
Prepared answer: that the financial statements would not be comparable and what might be a considered immaterial one year might not be immaterial the next
however I am struggling to understand:
- Why this figure was set on profit after tax?
- What might be the problems of using that figure rather than another?
- To which items in the financial statements will it not apply?
Question: An accountant has set a limit of 5% of profit after tax for materiality in the draft financial statements, so that errors below 5% of profit when aggregated will be regarded as immaterial and not adjusted when the final financial statements are prepared.
What might be the problems of using that figure rather than another? To which items in the financial statements will it not apply?